external finance

external finance

capital raised from outside the business

sources of finance

where the finance is coming from

methods of finance

how the finance is provided

examples of sources of finance

• Family and friends
• Banks
• Peer-to-peer funding
• Business angels
• Crowd funding
• Other businesses

examples of methods of finance

• Loans
• Share capital
• Venture Capital
• Overdrafts
• Leasing
• Trade credit
• Grants

family and friends

Investment from people known to the entrepreneur. May want to help support a business if they have some money

advantages of family and friends

• May be flexible repayment terms and conditions.
• May offer loans without collateral
• May provide interest free or low rate finance

disadvantages of family and friends

• Amount may be limited
• May place pressure on relationships
• Lenders may lose their money
• They may also want to be more involved in the business

family and friends are best for…

Small businesses running as sole traders or possibly a partner.

banks

Financial institutions that are licensed to the deposits, pay interests, make loans and act as an intermediary in financial transactions, as well as provide other financial services to their customers.

advantages of banks

• Fixed sum available via loans
• Easy to plan for fixed repayments

disadvantages of banks

• Often difficult to persuade banks to lend
• May not be flexible
• Requires interest payments
• May require collateral

banks are best for…

established businesses with a good credit record

collateral

asset(s) that a business owner promises to hand over to a lender if they fail to repay the loan

peer-to-peer funding

The process of an individual lending to other individuals (peers) with whom there is no relationship or contact via specialist websites.

advantages of peer-to-peer funding

• Gives borrowers access to funds at advantageous rates compared to some other forms of finance.

disadvantages of peer-to-peer funding

• Finance is restricted to small amounts and to small established businesses.

peer to peer funding is best for…

small established businesses so not suitable for big firms or start-ups

business angels

Usually high-net worth individuals who invest either directly or via network syndicates into start-up businesses in return for a share of the business.

advantages of business angels

• Normally very knowledgeable and experienced in business matters; may act as a mentor for the business, providing advice and guidance.

disadvantages of business angels

• May require some form of equity (share) which gives them a measure of control.

business angels are best for…

newer and possibly high risk, early stage or high growth business.

crowdfunding

raises finance by inviting lots of people to lend small sums of money via web sites listing businesses seeking loans

advantages of crowdfunding

• Millions of potential funders can be reached all over the world.

disadvantages of crowdfunding

• No guarantee that Crowdfunding will raise sufficient finance

crowdfunding is best for…

Unusual ideas and projects that might not attract other forms of finance

venture capital

Investment from an established business into another business in return for a percentage. Typically invests in early stage, high risk businesses with potential for rapid growth and/or high returns.